Jerome Powell and Janet Yellen are not concerned with inflation. Maybe they should be

Jerome Powell and Janet Yellen are not concerned with inflation. Maybe they should be

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And with the economy still struggling due to Covid-19, neither Powell nor Yellen seem overly concerned that the unprecedented amount of stimulus from both the central bank and Congress will trigger any persistent inflationary pressures yet.

Powell said at a lecture in Princeton last week that there could be “quite exuberant spending” by consumers in the coming months, thanks to stimulus checks and the improved economy after wider access to vaccines. As a result, some prices may go up.

But the Fed chairman argued that this may not necessarily be inflationary in the long run. Price increases can be – to use a Fed buzz word – transient.

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Yellen similarly noted in her Senate confirmation hearing last week that she believes the Fed and the Biden government should take advantage of near-zero interest rates and therefore spend more on stimuli.

In other words, now is not the time to worry about inflation.

“Inflation is always a concern and an easy concept to understand,” said Mimi Song, chief economist at CrossBorder Solutions. “A lower supply can lead to higher prices in the short term and more stimulus can lead to higher disposable income.”

But Song says the global pandemic and recession are likely to keep prices under control. The priority must be economic recovery, not fear of inflation several years from now.

Inflation may come back roaring

Still, some fear that Powell and Yellen are being too disdainful. The economy may not be able to maintain itself in a scenario in which inflationary pressure calms without boiling.

The 10-year Treasury yield is now above 1% – its highest level since March. Oil prices also rose 10% last month. These are signs that investors are betting on more inflation sooner or later.

“There is a tug of war around inflation,” said Todd Lowenstein, a stock strategy executive at The Private Bank at Union Bank. “Inflation may be transitory, but we need to keep an eye on the bond market due to huge federal spending.”

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Lowenstein said stimulus spending, while necessary, could lead to further declines in the dollar’s value, which would increase the flames of inflation. But the Fed is not in a position to raise rates to contain inflation while the economy is still so fragile. Inflation can become a more consistent problem.

“Could inflation consolidate? The Fed does not want to fight it now, but historically the question is that inflation is like toothpaste in a tube. It is impossible to put it back,” said Lowenstein.

If inflationary pressure increases, the Fed cannot ignore it indefinitely – at some point, it will have to fight it.

And that is the key. The Fed has tried to stay out of politics and do what it considers best for the economy, no matter what actions the president and Congress decide to take.

“The Fed risks losing the perception of its independence if it does not fight inflation,” said Adam Lampe, CEO and co-founder of Mint Wealth Management.

“An unexpected rise in inflation can be a risk,” he added. “Inflation is expected to be modest in 2021, but as soon as it leaves the stock market, it can return quickly.”

Keep an eye on wages and the job market

Therefore, the Fed may be forced to raise rates earlier than the market is expecting, or it may need to cut more quickly – or slow down – its current bond buying program. The last time the Fed made a significant change in its asset purchases, in June 2013, the shares were quickly sold in what came to be known as a “taper tantrum”.
Still, the biggest driver of inflation tends to be a healthy job market and higher wages for workers. This is not the case now.
According to the December job report, the average hourly wage grew by about 5% over the previous year. But the government noted that these increases “largely reflect the disproportionate number of workers with lower wages in leisure and hospitality who have left the payroll.”

In other words, wage growth would have been much less if more Americans were actually working.

Other government data show that there are only small pockets of inflation.

According to the latest consumer price index report, food prices rose 3.9%. Household appliance prices rose 6.2% and used car prices rose 10%. But overall, consumer prices rose just 1.4% last year.

“If you look at the stock market and sectors like real estate, you can feel that the economy is up. But there is still enough slack in the job market to avoid any short-term inflation,” said Craig Fehr, investment strategist at Edward Jones. “I don’t think inflation is a prevalent risk.”

Still, Fehr is concerned that inflation will inevitably become an important issue that lawmakers must address.

“In the long run, inflation risks cannot be overstated. The market is expecting incredible levels of stimulus from the Fed for a long period of time, ”he said. “If you ask me what usually keeps me up at night, it’s inflation.”

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